Investment Comment December 2017
4th December 2017
November saw some equity markets pull back after a strong October. In the UK, equities struggled across the market cap spectrum. The MSCI UK Large Cap (-1.60%) and MSCI UK Small Cap (-1.53%) fared slightly better than the MSCI UK Mid Cap (-2.44%). European markets also weakened, with Germany, Italy, France and Spain all showing negative returns for the month, driving the MSCI Europe down (-1.68%). Japan (+1.04%) continued to gain momentum following an uninspiring summer period. US equities also remained strong, with all major indices hitting record highs towards the end of the month, resulting in a rise in the MSCI US Composite index of 1.01% for the month.
Following the Bank of England’s (BoE) decision to raise interest rates in the UK to 0.5% at the beginning of the month, Sterling has gradually appreciated against the USD (+1.71%) and the Euro (+0.59%). Although Sterling started to weaken towards the end of November, the currency has shown a relatively consistent recovery over the course of the year, now +8.72% against the USD year-to-date and +3.20% against the Euro.
Brexit once again dominated the headlines as ministers approach an EU summit in mid-December, hopeful of the prospect that talks may have progressed sufficiently to begin negotiations on a transitional deal. Outlined in the Chancellor’s Budget, the Office for Budget Responsibility revised down the outlook for productivity growth, business investment and GDP growth over the next five years. Mr Hammond focused on the housing market, with plans to abolish stamp duty land tax for first-time buyers purchasing a home worth up to £300,000. The BoE declared that the UK’s banking system was prepared to withstand a ‘hard Brexit’, with all of the country’s biggest lenders coming through the annual stress test without the need for remedial action.
In Germany, political controversy resurfaced after Angela Merkel’s attempts to form a coalition government collapsed. The Euro fell c.0.5% against the dollar following the news, but quickly rebounded as investors remain bullish on the economic prospects for the bloc.
In the US, Donald Trump took a step closer to the first legislative victory of his Presidency. The Senate passed a bill to overhaul the US tax code for the first time since 1986. The bill will now need to be merged with separate legislation which has already passed the House of Representatives. The Senate plan cuts the corporate tax rate from 35% to 20% from 2019. It also cuts income tax rates but eliminates personal and dependent exemption deductions, amongst other changes.
Despite political developments leading to volatility across a number of markets, we continue to believe that economic conditions remain conducive to further growth globally and encourage our clients to remain well-diversified to balance any country-specific risk.